Under Armour’s Stock Rallies On Earnings Beat

Under Armour (NYSE:UA) reported a better-than-expected quarter to start off 2017. The company managed to beat both the revenue and earnings consensus estimates. Revenues came in around $1.12 billion, surpassing the consensus estimate of about $1.11 billion, while it reported a loss of about one cent. In fact, this is the first time in its history as a public company that UA has posted a loss. Despite this, its shares soared by about 10% post the call.

In the last two earnings calls, CEO Kevin Plank made it clear that the company is going to see some tough times ahead on the back of a slowing U.S. apparel market and relatively weak performances at footwear, driven primarily by soft sales of the Curry 3. That said, Under Armour continues to vie for long-term opportunity, opposing short-term gains at the expense of continued growth, as is evident in the financial figures this quarter.

International Markets To Play A Key Role 

As was expected, the company saw sales in North America shrink by more than 1% to about $871 million. The decline was driven primarily by the slowing apparel market and certain promotional activities that were included in the quarter to boost traffic. That said, Under Armour witnessed heavy growth coming in from its international markets. Business from outside the U.S. and Canada saw a mammoth 52% jump in revenues to reach $227 million this quarter, or 20% of the total revenue, offset partially by adverse currency headwinds.

The company continues to increase its e-commerce presence and the number of stores it operates in EMEA, Asia-Pacific and Latin America. The expansion strategy has significantly helped drive top line growth in these geographies.

EMEA revenues were up almost 55% to $103 million in the quarter. The top line in the region was driven primarily by continued momentum in the UK and Germany. The company saw balanced strength across all retail channels, with increases in all major sports categories. Revenue growth in Asia Pacific was even more impressive, reporting an almost 60% jump. China and Australia were the primary contributors to this growth. Additionally, this quarter marked the first full quarter of contribution from South Korea which is now direct versus previously being through a license. Lastly, Latin America witnessed a growth of almost 30% in its top line, driven primarily by growth across all distribution channels and categories.

Under Armour previously stated that it expects to increase sales to about $7.5 billion by 2018. Considering the current levels, this figure may just be out of reach for the company now. That said, overseas sales have increased by more than 50% since 2014. This is a key market for Under Armour to focus its efforts on, and can bring very strong sales numbers in the future. We can expect to see a higher contribution from international sales going forward.

2017 Guidance

The company expects revenues to grow by just 1 percentage point in the second quarter of 2017. The company expects the fourth quarter to be the strongest in the  year, owing to the implementation of its SAP platform and the seasonal boost from holiday sales. Gross margins are expected to be down by about 120 basis points in the first half of the year on the back of adverse FX fluctuations, efforts to manage a bloated inventory and significantly higher airfreight expense, all threatening to more than offset the benefit to channel mix. Gross margins are anticipated to be the strongest in the fourth quarter driven by seasonality. SG&A expenses in the first half of the year are expected to come in around the $15 to $20 million range.

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